The dawning of the age of the Anglo-Saxon

Hamish McRae on economic euphoria

We Anglo-Saxons have our tails up at the moment, don't we? The strongest-performing economies in the world have for several years been the US and the UK, but also Canada and Australia. The success story is reflected in currencies, for the US dollar is at its highest level since 1992 against the yen and sterling is back in its 1992 ERM range. Money is flooding into the dollar and sterling as "safe havens" in an otherwise uncertain world. By contrast the East Asian boom has collapsed, Japan is shuddering back towards recession and most of continental Europe is struggling with double-digit unemployment and the social strains that result from that.

Along with this superior economic performance has come a dominance of Anglo-Saxon economic ideology. A couple of years ago British think-tanks were praising "Asian values" and some British commentators were even lamenting the fact that our financial system was not more like the German or Japanese models. Now the smaller Asian economies are queuing up at the IMF for loans, Japan is about to imitate the City's Big Bang, taking it as a model for reform of its own financial system, and Germany and France are busily privatising their telecommunications networks.

Beware, my friends, beware. All the above is perfectly true and there is no reason why we should not enjoy our moment in the sun. But anyone who recalls what happened to the East Asian triumphalism of a year ago, or the German euphoria of 1990, should pause and ponder. Could Anglo-Saxon triumphalism prove just as ephemeral?

The answer comes in two parts; first, the underlying reasons for Anglo- Saxon superior performance; and second, the extent to which these seem likely to persist in the first couple of decades of the next century.

Part of the superior performance undoubtedly is cyclical. Both the US and the UK economies are running close to full capacity, whereas the continental European economies and Japan are not. You can see this most clearly in the unemployment figures, where the level in the US and UK is less than half that of Germany, France and Italy. You can also see the signs of strain in the US balance of payments, moving into even deeper deficit; and though the UK payments are just in surplus, a move into deficit this year is widely expected. By contrast, in continental Europe only Germany is in current account deficit while Japan is producing an enormous and rising surplus.

But not all this out-performance is cyclical. For a start it may be easier to increase capacity in the new service economy than it was in the old manufacturing one. For example, it is very easy to produce more copies of computer software; it is much harder to build a new car factory. In any case much of the supposed excess capacity of some economies may be unwanted. You certainly do not want new car factories: only yesterday Alex Trotman, head of Ford in America, said that there was 40 per cent over-capacity worldwide in car production and some of the greatest over- capacity was in Europe.

More importantly, the advantage that the US and UK seem to have achieved may be the result of structural changes that the rest of the world has yet to push through with the same vigour. These include acceptance of rapid downsizing of manufacturing, the costs (for of course they exist) of a flexible job market and the fostering of a culture of entrepreneurship. We will, of course, retain the advantage of the English language, enormously important in the media industries.

To what extent will this dominance last? Obviously there will at some stage in the next five years be some cyclical reversal. At some stage France and Germany are bound to grow faster than the UK, even though they haven't since 1992. The switch in fortune may even come this year, though I suspect that it is more likely in 1999.

In addition, we should be aware when we crow about the supposed advantages of the Anglo-Saxon system that features of it can quickly be adapted and applied elsewhere. The greater our intellectual victory in exporting our ideas, the more we narrow any comparative advantage we may have secured. Finally, we need to be aware that while on the measures of growth and unemployment the US and UK may look good, on some other measures (balance of payments in the US, general productivity in the UK) our performance remains relatively poor.

Looking ahead, there are certainly some reasons to expect the US and the UK to carry on their robust performance for the next couple of decades. One has nothing to do with economic ideology or even economic competence: it has to do with demography. Taking the proportion of the population over the age of 65 as a yard-stick, the US becomes the youngest of the Group of Seven nations by 2020, while the UK is the second youngest; Japan is the oldest, followed by Germany. The whole developed world will have a struggle to support its growing army of elderly people, but it will be more manageable in the Anglo-Saxon economies than elsewhere.

I think too that the lead that the US in particular has established in entertainment, communications and software - the great growth industries of the next two decades - will be very hard to pull back. Result: the US will dominate these industries for a generation, maybe longer. The UK will be modestly successful, but mainly as a sub-contractor to the US. We are lucky that we too speak English.

So will the current Anglo-Saxon euphoria last rather longer than its East Asian and German equivalents? I think it might, but it will become more muted. It certainly ought to become more muted. We should not underrate the ability of continental Europe and of Japan to learn from us, just as we have learnt and are still learning from them. Nor should we underestimate the weaknesses of the Anglo-Saxon system, the fact that markets make mistakes, give wrong signals, get carried away with their own enthusiasms. And we should be aware that though the East Asian region will have a difficult two or three years of adjustment ahead of it, it does remain the most vibrant part of the world economy. Let's enjoy our present relative success but let's also be aware that it will only continue if we are cautious and modest. There is a lot of luck in economic success, and for once this luck has come our way. We are still wholly capable of making a mess of things: we have done that before.